New York Partnerships Get Some Tax Filing Clarity in Budget Plan

A proposed fix to New York’s tax filing rules would provide guidance on how to report changes and pay the proper amounts to the state. It also could cause a huge influx of reporting and payments from partnerships if applied retroactively.

The New York Executive Budget for the 2025-2026 tax year includes a proposal to conform to federal partnership audit rules. New York, like many states, requires the “downward” reporting of federal changes to the state only when there is a federal audit or an amended federal return is filed.

Under federal audit rules, partnerships generally are subject to audit at the entity level, and any changes and payments are applied at the entity level. There are some exceptions, such as for partnerships with fewer than 100 partners, which can “push out” the changes to the partners.

Partnerships also can file administrative adjustment requests to self-report federal changes at the entity level. Partnerships that are subject to the federal rules generally receive an assessment at the entity level when the audit concludes.

Partners subject to these rules aren’t permitted or required to file amended federal returns. Because federal audits no longer lead to audit reports or amended returns, the mechanism to kick in state reporting doesn’t kick in.

For instance, if a partnership files an administrative adjustment request to change a tax deduction from $1 million to $0, the partnership will pay the tax at its level to satisfy all tax liabilities and satisfy its partners’ obligations.

But because no federal amended return has been filed and there’s no federal audit report, there’s no mechanism for the partnership or its partners to report the $1 million change, and the amounts may not otherwise be reported to the state.

New York would be able to collect its share of tax associated with the federal change if a federal amended return were filed. Similarly, a partnership that files a federal administrative adjustment request wouldn’t be able to obtain a refund at the New York level for federal changes.

According to the Executive Budget Briefing Book, this proposal “addresses this issue by requiring partnerships to report and pay New York tax on Federal adjustments that result in underpayments of tax, preserving critical State revenues.”

The measure would conform to the federal provisions retroactive to Jan. 1, 2018—the date the federal rules became effective. It includes a requirement for federal adjustments made prior to the rule’s enactment to be reported within one year of the effective date (without interest). So if the bill becomes effective April 1, 2025, the deadline to report prior federal adjustments would be April 1, 2026.

If the proposal is enacted, New York would be the latest state to enact legislation expressly addressing the federal audit rules. Arizona was one of the first states to conform to the federal rules (in 2016), with other states such as Louisiana, Massachusetts and New Jersey enacting legislation over the past few years. The Multistate Tax Commission, which represents state tax agencies, has issued a model statute specifically for reporting federal changes.

The issue has also been on the industry’s radar since the federal rules were enacted. The IRS also has increasingly scrutinized partnership issues, including initiatives focused on complex partnerships and certain industries (such as sports) operating as partnerships.

Until now, New York has offered no guidance on how to report these changes for audits or adjustment requests. The proposal would clarify how to report the changes and pay the corresponding amounts to the state.

Many businesses that operate as partnerships, including financial service firms and private equity structures, generally file New York partnership returns to report income taxable by the partners, not the entity itself. If a partnership must report a 2018 federal change during the 2025 tax year, and it has 200 partners, it may have to adjust distributions or otherwise seek the funds from the partners to make payments.

Partners often move in and out of large partnerships every year, making tracking federal reports of changes to the partners a difficult task. Due to record retention policies and accounting industry practices, it may be difficult to gather New York partnership information going back to 2018.

New York partnerships and its partners are closer than ever to knowing how best to apply federal audit rules with the proposed budget measure. However, its retroactive nature and the relatively short timeline may cause some compliance concerns for large partnerships that are subject to the new rules.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Robert Zonenshein is senior director at RSM with expertise in New York and New Jersey tax matters.

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